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Part of cannabis and investing

Convenience store operator Alimentation Couche-Tard Inc. will make a strategic investment in Fire & Flower Holdings Corp., which will use the funds to expand its network of cannabis retail stores and develop its Hifyre digital retail platform.

Couche-Tard’s initial investment, announced Wednesday but subject to approvals, will give it rights to 9.9 per cent of the Edmonton-based company’s equity and the potential to increase its stake to 50.1 per cent for a total of $380 million.

“Couche-Tard is excited to make this strategic investment in one of the fastest growing cannabis ‘pure-play’ retailers,” the Quebec-based retailer’s president and CEO Brian Hannasch said in a statement.

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“This investment in Fire & Flower, with a path to a controlling stake, will enable us to leverage their leadership, network and advanced digital platform to accelerate our journey in this new and flourishing sector.”

This is not Couche-Tard’s first foray into the cannabis sector. In February, the Quebec retail giant and Canopy Growth Corp. of Smiths Falls, Ont., announced they were teaming up to support a privately-run cannabis shop in Ontario, under the cannabis company’s Tweed banner. The companies also entered into a multi-year partnership, with the location in London, Ont. serving as its entry into a market that could lead to “future international opportunities.”

Alimentation Couche-Tard is one of North America’s largest operators of convenience stores and gas bars, primarily under the Circle K global brand and under the Couche-Tard banner in its home province of Quebec.

Fire & Flower currently operates or licenses 23 cannabis retail stores in Alberta, Saskatchewan and Ontario and a wholesale distribution division in Saskatchewan.

“This strategic investment by Couche-Tard, one of the world’s largest retailers, is transformative for Fire & Flower,” CEO Trevor Fencott said in a statement.

Go deeper with Cannabis Professional
Canada’s biggest convenience store operator will pay $380-million over three years for a controlling stake in one of the country’s largest cannabis retail chains. Read Marcy Nicholson's full report.

He added that Couche-Tard’s leadership team and international footprint in major markets such as the United States, Mexico and Europe “provide us with outstanding opportunities for aggressive growth.”

Peter Sklar, an analyst with BMO Capital Markets, said the initial investment will not impact the convenience retailer’s medium-term financial performance, but “our sense is that Couche-Tard aspires to be a significant retailer of recreational cannabis in Canada where private retailing is permitted.”

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“In addition, when federal legalization of cannabis in the U.S. is achieved, we believe Couche-Tard potentially aspires to be a consolidator of the cannabis retailing sector,” he said in a note to clients.

Cannabis is legal for medical or adult-use purposes in several U.S. states, but remains an illegal substance under federal law south of the border. However, the political climate is warming up with the U.S. House of Representatives recently holding hearings on pot legalization.

“Under such a scenario, Couche-Tard should be able to leverage learnings from both its partnerships with Canopy and Fire & Flower,” Sklar wrote. “However, we believe it will take some period of time for Couche-Tard’s U.S. cannabis strategy to unfold in a meaningful way.”

The companies say an indirect subsidiary of Couche-Tard will initially buy about $26 million of convertible debt securities that can be converted to 24.3 million common shares at a price of $1.07 each, representing 9.9 per cent of equity.

At the same time, Couche-Tard will receive three series of warrants allowing it to purchase more shares. It will also get the right to top up its investment to maintain its ownership percentage.

Fire & Flower’s stock is currently listed on the TSX Venture Exchange but it has received conditional approval to list its shares on the Toronto Stock Exchange concurrent with the transaction.

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Fire & Flower’s stock price jumped 20 per cent to a two-month high following the announcement. Later it was up 20 cents at $1.34 while Couche-Tard stock was essentially flat at $81.22 in afternoon trading Wednesday.

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